QE looks set to spark race for gold and silver

With the Olympics fast approaching, the demand for gold will become intrinsically intertwined with risk sentiment as dictated by the expected and ultimate result of the vote.

Joshua Mahony
Market Analyst, London

2016-07-27T17:00:00+0100

Source: Bloomberg

With just nine days until the Olympic opening ceremony, today’s sharp appreciation in gold and silver comes at a relatively opportune moment. July has not been particularly kind to either market, with gold falling 4% lower from the month’s high, while its more volatile running partner silver lost 9%. This will likely be associated with the fact that despite high expectations, we are yet to see any of the main central banks cut rates in the wake of the EU referendum.

From a technical point of view, both markets seemed to be primed for a sharp rebound, with silver in a descending triangle and gold in a symmetrical triangle. Today we seem to be seeing the beginning of that move higher and as such, there is a good chance we could see a substantial move higher over the coming weeks.

Gold

Gold has sold off towards a crucial long-term support level, as highlighted in the weekly chart below. The confluence of the 200-week simple moving average (SMA) alongside the May 2016 and January 2015 peaks meant there was also a very clearly defined support level that had to be broken for further losses to occur. This timeframe also shows the fact we have been rallying heavily since the falling wedge breakout at the turn of the year. As such, we have a clearly defined uptrend, alongside a major support level which is yet to be broken.

Gold weekly price chart

On the four-hour chart we can see a distinct symmetrical triangle pattern, with Monday’s failure to create a new lower low providing a key sign things were on the turn. Given the existence of both the 50-period SMA (four-hour) and $1324 swing high, we have a clearly defined resistance level. By breaking through this level, not only has the symmetrical triangle been negated, but also the creation of lower highs and lower lows has been reversed into higher highs and higher lows.

Crucially we have the grey support zone which encompasses the May 2016 and January 2015 peaks alongside the June 28 swing low. A break below this level would have pointed towards a deeper retracement, yet seemingly we are set to move back in favour of the medium-term trend, with further upside expected in the coming weeks.

The next important resistance levels to watch out for are $1334, $1338 and $1347. However, it seems likely we will reach and surpass the $1375 level over a longer period, given the likely easing from the European Central Bank (ECB), Bank of England (BoE) and Bank of Japan.

Gold four-hour

Silver

Turning to silver, the weekly chart once more shows a clear bullish breakout since the lows at the beginning of 2016. This wedge breakout provides us with the underlying bullish mindset that has underpinned the medium-term outlook for silver. The recent pullback brought price back down towards the 38.2% retracement, but crucially failed to break it.

Silver weekly

On the four-hour chart, $19.22 is a distinct support level which has underpinned price throughout this month. Essentially we have been looking for a break either below $19.22 or above $19.95 for the leg for this market. Given the wider trend coming into this pattern, the expectation was for a bullish breakout, yet we awaited the signal from price action itself.

Given that we have now seen this bullish signal, it is likely this market will push on from now, with $20.68 and $21.14 expected to be reached. This bullish view would be negated with a break back below $19.50.

Silver four-hour

Crucially, given the conclusion of tonight’s FOMC meeting, it would take something pretty substantially hawkish to negate this breakout. Easing is back on the table in the UK, while the ECB and Japan are also likely to be more dovish as a response to the EU referendum and the flight to safety that could bring (JPY appreciation).

Specifically, it is crucial to note that BoE has shifted 180 degrees from a hawkish stance to one where we could see years of ultra-low interest rates and quantitative easing. With that in mind, both silver and gold look likely to benefit from increased gains over the coming weeks, months and even years.